MINISTRY OF NATURAL RESOURCES, ENERGY AND MINING MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT NUM BER : P 120825 CREDIT NUMBER : IDA 0490 IO GRANT NUMBER : TF 12935 SECTOR : MINING FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30TH JUNE 2016 NATIONAL AU DIT OFFICE LILON GWE 3 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 30 JUNE 2016 TABLE OF CONTENTS PAGE Controlling Officer's Report Statement of Management Responsibilities 7 Auditor General's Report on the Financial Statements 8 Statement of Financial Position 10 Statement of Sources and Uses of Funds 11 Designated Account Movements-IDA 049010 12 Designated Account Movements-TF 1293 5 15 Accounting Policies 16 Notes to the Financial Statements 17 2 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 301h JUNE 2016 CONTROLLING OFFICER'S REPORT 1.0 Project Background and Description Government of Malawi prioritised the mining sector and included it in its priority within priorities as espoused in the Malawi Growth and Development Strategy (MDGS 1). According to the MGDS , mining is expected to contribute to economic diversification and development. In the MGDS II, mining is expected to contribute 20% of Gross Domestic Product by 2016. In order to achieve this objective, the government needs to create an enabling environment for mining and improve the mining sector governance. The Mining Governance and Growth Support Proj ect (MGGSP) was designed by the Malawi Government (GoM) in consistent with the Government's aim to diversify the economy from agro to mineral based . The Project became effective on 23rd August 2012.The overall coordination, and management of the Project is carried by the Ministry of atural Resources, Energy and Mining while implementation of the Project is being undertaken by key implementing institutions which are Department of Geological Surveys, Department of Mines, Department of Environmental Affairs, Ministry of Finance, Ministry of Education and Malawi Revenue Authority. The Project is being financed by a loan in the amount of US$25 million from International Development Agency (IDA) and a grant of approximately US$6 million equivalent in co-financing from the European Union making a total of US$31 million. The Project Development Objective (PDO) is to improve the efficiency, transparency and sustainability of mining sector management. Apart from being consistent with the national development agenda, the project objective is also in line with the themes of Promoting Sustainable, Diversified, and Inclusive Growth and Improving Governance contained in the 2012-2015 draft Country Assistance Strategy of the World Bank. The PDO will be achieved by: • Creating a conducive legal and regulatory framework • Updating geological information • Developing human capacity for the sector, and • Maximizing revenue col lection by Government The follow ing PDO results indicators are being used to assess project implementati on success; (i) Efficiency: a reduction in the days needed on average to issue mineral rights ; (ii) Transparency: annual public reporting of mineral sector tax revenues; and (iii) Sustainability: an increase in the percentage of mining operations subjected to environmental certificati on . 3 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 30 JUNE 2016 1.1 Project Components The project design comprises activities to be implemented under three components plus project implementation, as a fourth component. Highlights of the Projects Components are given below: 1.1.1 Component A: Managing Mineral Rights and Operations The objective of this project component is to support the Government to build an efficient, transparent and environmentally and socially sustainable framework for managing mineral rights and operations. To achieve this, the project will support the following: A-1 Public Communications, Outreach and Stakeholder Dialogue by setting up the structure and support arrangements for continuous and formalized dialogue among stakeholders on mining policy issues and oversight of policy implementation, as well as design of Ministry of Mining's communications and outreach functions. A-2 Reforming Minerals Legislation by finalizing the new mining law and developing a body of regulations to give effect to it, covering mineral licensing, monitoring and inspection functions, health, safety and environmental standards, and a model Mining Development Agreement. A-3 Modernizing Minerals Licensing by establishing a modern computer-based cadastral system and administrative arrangements for the efficient and transparent allocation and management of mineral exploration and mining rights by Ministry of Mining. A-4 Strengthening Mineral Operations Supervision by building capacity of Ministry of Mining for regular monitoring and inspections of exploration, mining and mineral processing operations using appropriate equipment. A-5 Strengthening Environmental and Social Management of Mining by establishing a comprehensive environmental and social management framework and robust monitoring systems at central, district and community levels. 1.1.2 Component B: Generating and Managing Mineral Revenues The objective of this project component is to support the Government to develop transparent arrangements for optimal generation and use of mineral revenues . To achieve this, the project will support the following: B-1: Reforming the Mineral Royalty and Tax Regime by completing the establishment of a coherent, standardized and globally competitive fiscal regime 4 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 30 JUNE 2016 for mining through design and implementation of suitable royalty and tax regulations . B-2: Maximizing Mineral Revenue Collection by building capacity in royalty and tax administration. B-3: Building Mineral Revenue Transparency so that revenue collection arrangements can be subjected to scrutiny and assurances given to the public that revenues are being properly accounted for. B-4: Developing Mineral Revenue Forecasting as part of the Government ' s annual budget preparation cycle and medium-term macro-economic planning. B-5: Developing Mineral Revenue Management Policies to deal with potentially large and volatile mineral revenue flows and determine allocations made from funds collected. 1.1.3 Component C: Promoting the Mining Sector The objective of this project component is to support the Government to improve the enabling environment for mining sector development by acquiring and disseminating geo-data, fostering more sustainable artisanal and small scale mining, increasing the supply of Malawians trained at tertiary level in mining-related disciplines and improving the policy environment for mining-related infrastructure development. To achieve this, the project will support the following: C-1 Program of Geo-data Acquisition, Interpretation and Promotion , including a comprehensive country-wide airborne geo-physical survey to acquire new data, interpretation studies and resource assessments to identify promising mineral opportunities and activities to promote investor interest. C-2 Establishing a Geo-Data Management Centre to digitize, store and increase on- line access to geo-data. C-3 Program of Training and Awareness Raising for Artisanal Mining to gradually improve Artisanal and Small scale Mining (ASM) practices and institutional support to the ASM sub-sector. C-4 Building Capacity for Tertiary Education in Mining to increase the suppl y of Malawians qualified at tertiary level in mining-related disciplines in order to help build the regulatory capacity of government institutions and to alleviate the chronic skills shortage faced by a fast growing mineral sector. C-5 PPP Framework for Mining-related Infrastructure to assist the Government roll-out the Public Private Partnership (PPP) framework to the mining sector, through support to Ministry of Mining in tailoring the framework to mining-related infrastructure development and building requisite expertise . 5 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 30 JUNE 2016 1.1.4 Component D: Project Management This component provides implementation support to Ministry of Natural Resources, Energy and Mining in undertaking project management, in accordance with the Bank' s fiduciary and other guidelines, including incremental operating costs, equipment, training on fiduciary and project management issues, project audits and engagement of technical advisers to provide technical expertise on project performance monitoring and planning. Patrick Matanda SECRETARY FOR NATURAL RESOURCES, ENERGY AND MINING 6 MINING GOVERNANCE AND GROWTH SUPPORT PROJECT PROJECT IDENTITY NUMBER-P120825 INTERNATIONAL DEVELOPMENT ASSOCIATION-CREDIT NUMBER IDA 049010 EUROPEAN UNION-GRANT NUMBER TF12935 FOR THE YEAR ENDED 30 JUNE 2016 STATEMENT OF MANAGEMENT RESPONSIBILITIES The management of Mining Governance and Growth Support Project is required to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the project as at the end of the financial year/period and of the operating results for that year. The management is also required to ensure that the project keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the project and enable them to ensure that the financial statements comply with the financial agreements and statutes. In preparing the financial statements the management accepts responsibility for the followin g: • Maintenance of proper accounting records; • Selection of suitable accounting policies and applying them consistently; • Making judgment and estimates that are reasonable and prudent; • Compliance with applicable accounting standards when preparing the consolidated financial statements, subject to any material departures being disclosed and explained in the consolidated financial statements. The management also accepts responsibility for taking such steps as are reasonably open to them to safeguard the assets of the project and to maintain adequate systems of internal controls to prevent and detect fraud and other irregularities The management is of the opinion that the financial statements give a true and fair view of the financial affairs of the project and of its operating results. The financial statements have been approved by the Ministry of Natural Resources, Energy and Mining and are signed on its behalf by: SECRETARY FOR NATURAL PROJECT COORDINATOR RESOURCES, ENERGY AND MINING 7 The Auditor General, Telephone No. : +265 01770 700 P. 0. Box 30045, Facsimile: +265 01773 071 Capital City, E-Mail: nao@nao.mw Lilongwe 3. MALAWI. AUDITOR GENERAL'S REPORT TO THE SECRETARY FOR NATURAL REOURCES, ENERGY AND MINING ON THE FINANCIAL STATEMENTS OF THE GOVERNANCE AND GROWTH SUPPORT PROJECT FOR THE YEAR ENDED 30 JUNE, 2016 I have audited the accompanying Statement of Financial Position of Mining Governance and Growth Support Project; credit number IDA 049010 and grant number TF 12935 and Statement of Sources and Use of funds for the year ended June, 2016 and related notes as set out on pages 10 to 22. Management's responsibility for the financial statements The Management of Mining Governance and Growth Support Project is responsible for the preparation and fair presentation of these financial statements in accordance with the International Public Sector Accounting Standards (IPSAS), Donor terms of agreement, in line with section 5.09 of the General Conditions of the International Bank for Reconstruction and Development. This responsibility includes: designing, implementing and maintaining internal control system relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. Auditor's responsibility My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with International Standards of Supreme Audit Institutions (ISSAis). Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 8 AUDITOR GENERAL'S REPORT TO THE SECRET ARY FOR NATURAL REOURCES, ENERGY AND MINING ON THE FINANCIAL STATEMENTS OF THE GOVERNANCE AND GROWTH SUPPORT PROJECT FOR THE YEAR ENDED 30 JUNE, 2016 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on my judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, I consider internal control system relevant to the project's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the project's internal control system. An audit also includes evaluating the appropriateness of accounting policies used, as well as evaluating the overall presentation of financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Opinion In my opinion, the financial statements present fairly, in all material respects, the financial position of the Mining Governance and Growth Support Project funded by the World Bank and European Union as at 30th June 2016, in accordance with the International Public Sector Accounting Standards (IPSAS), Donor terms of agreement, in line with section 5.09 of the General Conditions of the International Bank for Reconstruction and Development ~ S.D.L. Kamphasa · Date: ..~J.(